As US population ages, private insurers reap more money from government-run Medicare

Private insurers are reaping a veritable windfall from the federal government’s heavy spending on the elderly — with demand from the COVID-19 pandemic leading to more robust offerings.

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Following a trend that has been growing in the past few years, both Cigna (CI) and United Health Group (UNH) announced expansions of their Medicare Advantage plans for 2021 — with Cigna expanding in 67 counties and UnitedHealth expanding in 300 counties.

In addition, Walmart (WMT) has joined in with its own insurance education services, in order to help seniors sign up for Medicare plans.

The two health insurance giants are expanding in an increasingly competitive market, dominated by players like Humana (HUM) and Centene (CNC). They are also seeing a swell of startups including Clover Health, Oscar and Bright Health.

According to Brian Evanko, Cigna’s president of Government Business, insurers are faced with a convergence of factors that include a willing government payor, an increasingly aging population, and the flexibility to compete with robust offerings.

Many plans have $0 premiums —a key selling point — and thanks to the popularity of telehealth during the pandemic, both insurers are offering $0 copays on telehealth visits. Cigna is now offering behavioral health virtual visits, as well, while UnitedHealth promoted its $35 cap on insulin.

For Cigna, traditionally a big player in commercial and employer-sponsored plans, the expansion marks the largest in the space to-date. The overall number of counties, 369 in 2021, represents 30% of the Medicare market in America, and a 22% growth from the previous year, Evanko said. By 2024, the company is targeting 50% of the market.

And companies like Cigna will continue to shift their resources and efforts into the Medicare Advantage market, as ongoing bipartisan support fuels growth. It’s a captive pipeline, Evanko explained.

“There are 14 million commercial members who will age into Medicare in the coming years,” he said, adding that Medicare supplement enrollees and Part D enrollees will also eventually migrate to Medicare Advantage.

‘Significant growth opportunity’

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SARASOTA, FLORIDA – JANUARY 04: Charles Miller, 90, prepares the daily pills his wife will need for the week on January 4, 2020 in Sarasota, Florida. His wife has had a recent stroke and a heart attack, and needs approximately ten different medicines daily which need to be carefully monitored. (Photo by Andrew Lichtenstein/Corbis via Getty Images)

As the book of business has grown in recent years, it has called into question how long insurers can expect to continue profiting from government funding.

According to data from the Kaiser Family Foundation, last year “gross margins for Medicare Advantage plans averaged $1,608 per covered person per year between 2016 and 2018 – about double the average annual gross margins for plans in the individual and group markets ($779 and $855 per member per year, respectively.”

The concept of Medicare Advantage involves being paid a monthly sum to care for a set population of patients. It is similar to the setup seen in value-based payment models on the commercial side, which also got a boost during the COVID-19 crisis.

To that end, Humana recently said it has seen savings from implementing value-based relationships with doctors, rather than traditional fee-for-service. That type of innovation, in partnership with the federal government, allows companies to compete well, according Evanko.

“Medicare Advantage represents a significant growth opportunity for Cigna,” he said. “We expect to grow 10-15% annually.”

The rate of growth expected comes as no surprise, as insurers have been able to profit off of the segment at a rate far greater than commercial plans.

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